A normal person thinks of attacking the problem on a single day, like sending out hunters to cull the wolves and forcefully decrease their number. A Mage of Equilibrium thinks ahead to where the forces will eventually settle, and asks how to change the balancing point.

(All quotes in this post are from Eliezer's "Dark Lord's Answer".)

"Dark Lord's answer" is a light novel (~1h read) by Eliezer Yudkowsky. It includes some fantastic explanations of some basic economics, which I think everyone should understand. I've copied the relevant excerpts (which include only very minor spoilers) in the excerpts section below. I think these (especially the second) excerpts are still very worth reading even if you already read all other economics posts by Eliezer.

Review of the story

I really liked it. The two other people I know also thought it was great, even though Eliezer considers it one of his not-so-great works. Surprisingly to me, it's only rated 3.72/5 on goodreads.

My scores:

• Educational value per character: 9.3/10 (Most comes from the two excerpts I included below)
• Humor: 9/10
• Excitingness: Not very exciting in the standard "dangerous situation" sense; slightly sexually exciting; somewhat exciting in the sense that it sets up confusions you want to know the answer to.

You could just try reading until the middle of chapter 2 or so, and if you don't like it then just drop it and read only the excerpts here.

More precise review with very minor spoilers

A main part of the story is that the country of Santal experiences recession caused by deflation. The mechanisms of how deflation causes this aren't successfully communicated through the story. Eliezer mentioned that he failed to explain that part well there. (He tried again in "Frequently Asked Questions for Central Banks Undershooting Their Inflation Target", but I'd say he still failed there.)

(I also think the extent of the recession through deflation described in the story is excessive, considering nothing like minimum wage laws are mentioned and on priors I wouldn't expect the country Santal to have such. But that's too complicated economics to discuss in this review.)

Excerpts

The concept of an equilibrium

"Then, what does a Mage of Equilibrium do?" It wasn't just that I wanted to know what could be wrong with Santal. Ordinarily, curiosity about Magic is a curiosity that can never be satisfied at all. 

Elaine seemed to think for a time, and then she reached down to the floor of the carriage and lifted up a blade of grass that had been tracked in by someone's boots. She held out the blade of grass in front of her, horizontally, so that the end drooped down.

"Why does this blade of grass have the shape that it has?" said Elaine. 

"Ah..." That was all I could say. "Because that was how God made it?" "No," Elaine said, "I mean, why is it standing out nearly straight near the root where I hold it, and then the thinning end curves down toward the ground?" She traced out the line of the blade of grass as she spoke. 

I opened my mouth and then shut it again. "I know the answer but I don't know how to put it into words." 

"Putting things into words is important," said Elaine. "The end of this grass-blade is falling down, the way all things fall down; its own weight pulls on it. Then why doesn't it fall all the way to the ground? Because something else is pulling upward on the end of this grass-blade, as hard as gravity pulls it downward. That upward pull must be exactly as strong as the downward pull, because otherwise the end of this blade wouldn't stay in place. If the downward pull was greater than the upward, the end of the blade would move down. If the upward pull was greater, it would move up. Gravity is a force that is pulling downward the end of this blade of grass. So, what pulls it upward?" 

I gazed at the drooping blade of grass, trying to wrap my mind around this foreign way of thinking. "Is it... the way you're holding the other end?" 

"It's the grass's resistance to being bent. Gravity pulls on the end and moves it downward. As the end moves downward, the blade of grass bends more and more. The more it bends, the more it resists bending further. When the blade of grass's resistance to being bent matches the force of gravity on it, that's where it settles. That's an equilibrium, something that appears motionless but is poised at the balance of forces pulling on it."

I blinked, and only then realized that my eyes had become dry from not blinking. I've heard legends about great Mages knowing the secrets of forgotten gods and the constellations in the sky, but it was incredible to think that they could also pick up a random blade of grass and find something deep to say about it.

Elaine then put out a finger from her other hand, and pushed down the blade of grass. "I've added more force and altered the equilibrium. Now the resistance of the grass to being bent, matches the force of gravity plus my finger's force. So if I remove my finger—" The blade bounced back up, then settled in its former place. "The resistance pulls the blade of grass back up, higher than its previous position, before it returns to where it always was. Now tell me, prince, what would you do if a village came to you with the report that wolves in the forest nearby had grown exceptionally numerous?"

"I'd send out hunters to kill the wolves, perhaps."

Elaine nodded. "Tell me, suppose that instead you had a hundred times as many wolves captured, and brought to those forests for release—what would happen then?"

"Yes, but what would happen one year later? Would there always be a hundred times as many wolves in the forest, from then on?"

"No, because some of the wolves would die of old age..."

"But female wolves would also have children. The equilibrium for the number of wolves is a point where 'death' and 'birth' are pulling on that number with equal force, so that the number stays in the same place. Adding a hundred times as many wolves would also mean adding a hundred times as many dams to become pregnant. But, young wolves have to eat. If you add a hundred times as many wolves to the forest but not a hundred times as many rabbits, most of the wolves will starve and soon you'll have the same number as before. It's like pushing down on a blade of grass and having it drift back up again. The force of 'death' becomes stronger than the force of 'birth' until the number of wolves decreases back to the point of balance. So, what happens if instead of adding new wolves, you send out hunters to kill wolves and reduce their number?"

"Ah... the number of wolves goes back up a year later, like the blade of grass springing back?"

"Perhaps. It's tempting to say that after the hunt there will be fewer wolves, so that the rabbit prey becomes plentiful relative to wolves and more young wolves survive, until the wolf population balances at the same place it did before. But, it might take a while for the wolf population to be replenished that way. Or maybe there are lions that also hunt rabbits, so after the hunt the lion population increases at the wolves' expense. If lions don't attack the villagers and wolves do, then that might be a fine solution." Elaine pinched the blade of grass between her fingers, and it broke; after that, the end fell down and didn't rise back up. "The concept of Equilibrium isn't that everything you do bounces back and comes to nothing. The Equilibrium isn't a living mind that resents people meddling with it and lashes back. It's not a precarious wobbling thing that always crashes if you upset it. Nor is the Equilibrium an ideal state of perfection so that any departure from it is worse. Rather, the concept is that everything settles at a place that balances forces, and after you interfere, it'll settle into a new place that's a balance of forces. A normal person thinks of attacking the problem on a single day, like sending out hunters to cull the wolves and forcefully decrease their number. A Mage of Equilibrium thinks ahead to where the forces will eventually settle, and asks how to change the balancing point. Sometimes the answer is just to send out hunters to attack the wolves every year, but sometimes you need to poison rabbits instead. And one ought to begin by asking why the mountains have more wolves in the first place—whether some new force has upset the previous balancing point that had fewer wolves."

This girl. This girl must be a sage in her own right, not just a scholar whom the Dark Lord has subjugated. I can barely wrap my mind around two words of this.

Even so, there was one thing I could guess. "You're saying the Dark Lord suspects that someone has disturbed the Equilibrium of my country of Santal."

Elaine looked a little surprised, before her face went expressionless again. "Yes, that's so. Like you said, there's no Magic powerful enough to directly oppress the farmers and shopkeepers of a whole country. So we're not looking for a straightforward curse, but some new factor that has changed Santal's balancing point."

The thought of Santal's enemy being that clever sent a chill through me. I always thought of Mages as people who could throw mighty fireballs or summon water in a desert. The thought of people existing like a 'Mage of Equilibrium' who could apply influence and watch a whole country bend like a blade of grass—that frightened me.

Subsidies and charity

We walked past a candle-seller, then an egg stand, then a piteous beggar with a twisted leg. I gave no thought to it as I dropped a copper coin in the beggar's bowl; it had been drummed into me from an early age that if a prince can't afford to give alms, who possibly could? It would have been a silver coin, except that I was traveling quietly.

After I dropped that coin, I think I noticed Elaine's scrutiny on me, but I said nothing to it. Yes, giving alms is a righteous act. I will go on doing so even now that I've gone to the Dark Lord for an answer. They say 'the same soul can't go to both Hell and Heaven', but even if the charitable act has become meaningless to me, it's not meaningless to the beggar.

"I'm sorry," Elaine said a little later, without looking at me. "I shouldn't have spoken to you so harshly."

Hold on, should you really be apologizing to me? Don't you have your own troubles?

"I understand that you were moved by a wish to help," Elaine said. "I try not to scorn that feeling. Even so, it's dangerous to help where you don't understand."

"You say that in the tone of a proverb," I said. "But that's a proverb I don't know. Would you explain it to me, please?" It was obviously fishing for information, but I didn't see how else to ask.

We were passing a baker's stand just then, and Elaine stopped. She looked over the loaves of bread, then hailed the baker. "Baker," said Elaine, "why don't you raise your prices?"

"What?" said the baker, sounding as confused as I felt.

"Why not sell each loaf of bread for eight coppers, instead of four coppers? Wouldn't you rather make twice as much money?"

"Hey," I muttered to Elaine, "what are you doing?" There was another customer there, staring at us incredulously, and we were strangers in this city.

"I won't cheat my customers like that," the baker said stiffly.

"Cheating is when your customers are deluded about the terms," Elaine said, even though now the baker was glaring dangerously at her. "It's not dishonest if the goods and price are both stated openly. Therefore, the reason you gave me wasn't the real one."

"Elaine!" I hissed.

Elaine tossed the man a silver piece—a silver!—took one of the loaves while he was still gaping at her, and walked on.

I hurried to follow. "What just happened?" I said.

Elaine tore a corner off the loaf, bit into it, and made a dissatisfied face. "Hmph. It seems that even though I paid four and a half times as much money, the bread didn't get any tastier."

Of course it didn't! Why would you even imagine that it would?

"Here's my question, Prince Nama of Santal. Suppose the people of your land come before the throne and say that the price of bread in your kingdom is very high, and they can't afford it. What would the Queen of Santal do in that case? Would she command all the bakers to lower the price of bread? From what you know of your mother, would she do that?"

I shook my head. "My mother isn't so simple a ruler as that. It hasn't happened in our generation, but when the price of bread goes up, it's usually because the price of grain has increased. If the price of grain is low and the bakers are still charging high prices for bread, only then do you reprimand them. But it can be difficult to explain to the townsfolk that the bakers have their own merchants to pay, since the townsfolk only see the prices posted in the store. Sometimes they riot and burn down the baker's shop, but that doesn't help anything at all, so you have to suppress them."

Elaine's lips twisted at the edges, but you couldn't call it a smile. "Then your mother isn't entirely without wisdom. But suppose the harvest was poor and the price of grain went up, so that loaves of bread were selling for eight copper pennies apiece. And suppose your mother decided that the crown would pay three copper pennies towards the purchase of each loaf of bread, so that the buyer only needed to pay five pennies of the price themselves. Would that ease the plight of the people?"

"Certainly," I answered. "But it would deplete the treasury. There's only so much metal in the crown, as the proverb goes."

Elaine shook her head. "Paying those three coppers might not help anyone at all."

I thought about this, puzzled. "How could it not help? If bread is expensive, that's a pain to the person who pays for it; but if the crown took on that pain in place of the townsfolk, at least the townsfolk would be happy... no?"

Elaine pressed her fingers together in a configuration that I recognized; she was miming holding that blade of grass from before. Then she pressed her thumb and forefinger together harder, I recognized from her whitened knuckles that she was exerting force, but her fingers stayed in the same place. "At this moment," said Elaine, "I am exerting equal force with these two fingers, so that they continue to meet in the same place without moving. Tell me, what determines the price of a loaf of bread? What pulls it down, what pulls it up, where do the two forces balance?"

Um.

I can honestly say that I never thought of the price of a loaf of bread as being pushed on by anything, any more than I thought of a blade of grass that way before I met Elaine.

After thinking, I said, "I believe the desire of the baker for money pulls up the price, and the distaste of the townsfolk to lose money pulls down the price, so maybe it balances when the baker is as happy as the townsperson is unhappy."

"Think of the Equilibrium," Elaine said. "The equilibrium in this city is four coppers per loaf. At that price, the forces pulling the price up and the forces pulling it down have balanced. If we imagine the city's price starting out higher than that, with nothing else changing, then we should expect to find some downward pull on the price becoming stronger, or an upward push becoming weaker. Like how a bent blade of grass resists more if you try to bend it further down, and that's why gravity doesn't pull the blade any further than it already goes... So, if we imagine that all the bakers in this city happened to be charging five coppers per loaf, what downward force would grow stronger?"

I said, "With great wisdom and perspicacity, I have determined the answer is that I don't know."

Elaine walked onward, looking distant. "Consider that if the other bakers were charging five coppers with nothing else changing, a baker could gain more custom by charging only four coppers. We already know that four coppers is a profitable price for a baker in this city, as matters stand." Elaine made a sweeping gesture with her hands. "Now take a step back from considering individual bakers. Consider all the people, in this whole city, who might want to buy bread. The higher the price goes, the fewer people wish to buy bread. The lower the price goes, the more people wish to buy bread. And then from the standpoint of the bakers, if the price of bread goes up, they'll spend longer hours tending their ovens, but if the price of bread goes down, some of them might go bankrupt and not bake any more loaves. Now every time a loaf of bread changes hands, there's both a buyer and a seller, so ultimately loaves sold and loaves bought must be equal. The market for bread settles into a price where the loaves sold and loaves bought are equal to each other—the price where the forces of buying and selling are in equilibrium. Thinking back to the individual bakers, if the general price rises higher than that equilibrium, then there's a baker who could profitably sell at a lower price and find more customers that way. They'd receive fewer pennies per loaf, but sell more loaves, and make a greater profit than the others. On the other hand, if the price drops lower than that equilibrium, the bakeries sell out quickly, and there are unanswered buyers who'd patronize a baker that reserves loaves and sells them at a higher price."

Elaine and I strode on towards where our carriage was housed, because the sun was almost setting now.

"That seems like a complicated way of looking at the world," I remarked. 

"It's a necessary understanding for a ruler. It's why, if the kingdom has a bad harvest, you can't help by commanding bakers to cap the price of bread. To make that clear, consider the case of a town under siege where there are only enough baker's ovens to make one thousand loaves per day. The price must rise to a point where only one thousand people can afford loaves of bread at that price. Let's say that the natural price is that one thousand people can afford loaves when they're ten coppers apiece. If you try to cap the price at five coppers per loaf, then some other force must reduce the number of buyers to one thousand, because there's only one thousand loaves to be sold. It might be that bakers begin to sell only to their friends, or that bakers take bribes, or that it becomes a contest between customers to see who can wait outside the shop for the longest time before despairing. Now do you see why it also wouldn't help, if the city governor pays three coppers of the price per loaf?"

I shook my head. "I know you're about to say that things go back to the Equilibrium, but I don't know what you'll say is the reason."

The lowering Sun before us made Elaine's face seem less pale than usual beneath her hood, giving her the false appearance of healthy cheeks. "Even if the governor pays three coppers per loaf, in that city under siege, the price must still rise to where only a thousand people can afford bread, because that's all the bread there is. If a thousand people can afford ten coppers from their own pocket, and the city governor pays three cents more per loaf, the price settles at thirteen coppers. Now, this rule might not be true of a whole kingdom with a bad harvest. If grain can be imported from foreign countries, then a higher price for bakers means the bakers can buy grain from abroad. But if it's too expensive to import grain like that, or if the grain will be too slow to arrive, then the ruler can't help people at all by paying three cents per loaf of bread. The same number of people will go hungry and they'll be equally poor at the end of it. The same goes for any other good whose supply doesn't easily increase—the crown paying part of the price just sends the price higher. No matter what, for every loaf bought there is a loaf sold, and therefore the forces of buying and selling must be in balance."

"Are you a former court advisor?" I said. No normal person had any excuse to know something like this.

Elaine's eyes seemed fixed on some far point. "I suppose I was invested with some small amount of sovereignty, enough to concern myself with the workings of my country. However, even though that's true, to say it would be deceptive. It's more that I was in training to be a scholar, before."

Before what, exactly? 

And what in heaven's grace does it mean to be invested with 'some small amount of sovereignty'? Being queen, but only for an hour after midnight?

"I think I understand your point," I said. "There are certain strange circumstances in which, through the workings of the Equilibrium, trying to help a person will come to nothing."

"My point is that you must understand the operation of the equilibrium in order to avoid hurting those you are trying to help. You gave alms to that beggar with the twisted leg we saw before. Tell me, what was the meaning of your act within the equilibrium of begging?"

"Are you one of those people who believes beggars are lazy and that giving them alms only encourages them?" I said. I hadn't expected that of Elaine. "I don't think someone with a twisted leg is begging only because he's lazy!"

"Oh, I'm sure those beggars are not lazy, and their lives aren't comfortable. It'd be strange for there to be an easy occupation, much easier than farming, that anyone could do—why would anyone be a farmer then? So we shouldn't expect that's where the equilibrium here has settled."

I wearily rested my knuckles against my cheek. "Did my giving that person a copper somehow disturb the Equilibrium, then?"

"As I said before, an equilibrium isn't a living thing that dislikes being disturbed, nor is it an ideal perfection."

Fine, then; tell me about it.

Elaine spoke on. "We can imagine a city where people who fall into true need become beggars for a time, and only those needy people are asking for alms. But is that arrangement stable? Is it a state of affairs where forces have come to a balance and settled? Passersby who give alms are like a tree that bears fruit. It's human nature that if a fruit tree exists, someone will try to build a fence around it so that they can have the fruit to themselves. If you're giving alms, you're a source of money, so somebody will try to build a fence around you."

"I didn't notice anyone building a fence around me," I said politely. "What do you actually mean?"

"If there are three beggars on the same street, they'll need to divide the alms among themselves. So a beggar will try to defend their territory from other beggars, with violence if some person oversteps their bounds. Some needy person who tried begging without permission would find themselves in jeopardy. But then we have to ask further—are beggars the most skillful people in the city for using violence and making arrangements like that? In many large cities, there are criminal lords in the underworld who assign territories to beggars. It's also natural to expect that the under-lord will ask for tribute from the beggars, and demand as much payment as the beggars can afford to give before they starve. If we consider your alms-giving as a single act in isolation, that one beggar may do better for that day. But if we imagine all people being more charitable, the result is just that the under-lord demands a higher toll from all beggars. Then, some masters or begging organizations may deliberately cripple the limbs of beggars so that people will be more charitable toward them. As compassionate souls supply more alms, the profit from doing that becomes greater—"

"There's no proof that any such thing is happening here!" My voice was heated, I admit. Wouldn't your voice be heated too, if you gave charity and then somebody accused you of contributing to others' troubles?

"I observed as we walked," Elaine told me calmly. "The beggars here maintain regular distances from each other across many streets, more like someone is spacing them than like they are distributing themselves each morning. They tend to have visible deformities of their limbs, or sores on visible parts of the body, which would be a remarkable coincidence if we were looking at people who'd fallen into need for many random reasons. The beggars don't look frightened of the city guards or passing mercenaries, which suggests that a powerful person protects them, or rather owns them. It's not certain that this city is one with organized begging that excludes random unfortunates and practices deliberate maiming, but I've seen what I'd expect to see if that were true."

This is the woman whom the Dark Lord sent to observe my country and confirm his expectations. I should have remembered that.

"I ask you," I said with my heart thick in my throat, "that after you examine Santal's condition, you tell me whether the beggars of my own country are the same."

Elaine gave me a measured look. "And then you'll do what? Outlaw begging? What will your citizens think of the crown, if your soldiers are cutting down beggars in the streets? Isn't such an act what people imagine as 'the Dark Lord's answer'?"

I couldn't think of what to say. "What do you think a ruler should do, if not give alms to beggars?"

Elaine's posture changed, her shoulders slumped; she now seemed to trudge the streets rather than walking them. "For some reason, that seems to be a ridiculously difficult question. Even if every farmer could produce one hundred times as much grain, even if the crown owned mountains of gold and spent it like copper... even so, your country would still have poverty, and people living in deprivation."

"What kind of crazy Equilibrium is that?" I was somewhat shocked; I couldn't imagine a situation like the one she described. Who would even eat all that grain? Wouldn't most of it go to waste? Why couldn't the starving beggars just eat it?

Elaine exhaled softly. "The equilibrium that only balances at points where some people are desperately unhappy and poor, even when every farmer can produce one hundred times the harvest... I honestly don't know how that can be. I'm not sure any Mage of the Equilibrium knew, back in my country. But to answer your original question about what to do instead of giving alms to beggars, there was one sage of my country who said this: Whenever you pass a beggar and feel a compassionate impulse, find a poor person who seems to be laboring industriously and give them the money instead. Distributing a copper to every citizen of the country without discrimination would also be fine. The damage isn't from giving charity, but from requiring people to appear as beggars to receive it."

I had an uneasy feeling about what I'd just heard, like a voice telling me that I'd just missed something, but I didn't know why.

As Elaine and I were coming near the latest inn where our carriage was waiting under Anisha's eye, we passed another beggar. 

So I hailed an apple-seller who was dressed in rags but seemed diligent, and I paid her a silver piece for an apple, walking away from her stammered question. 

To the beggar I gave nothing. That, I now understood, was the Dark Lord's answer.

I thought Elaine might finally smile, but instead she was gazing at me keenly. 

"You see," I told her. "I understood your warning about how trying to help someone foolishly can have unpleasant effects. So then, is there something you want to say to me about your own situation?"

Elaine did smile then. 

"No," she told me.

ADDED: By now I also ran across the following post which I would also very strongly recommend: https://www.lesswrong.com/w/a-quick-econ-faq-for-ai-ml-folks-concerned-about/